Financial Derivative Case Studies

There are lots of methods to solve the changes in foreign currency and interest rates issue, however, derivative financial instruments are the major tunes Nike enterprise has used to tackle this issue. Despite the fact that this approach does not wipe out comprehensively the risk of foreign exchange, Nike enterprise still utilize it to minimize or delay the negative consequences. Specifically, the derivative financial instruments comprise embedded derivatives, interest rate swap, and foreign exchange forwards and options contracts (Nike annual report, 2014).

Mr. Brown readily admitted that he was not at ease discussing the most recent approaches to risk reduction or hedging. He had received his MBA from Harvard in the 1960s and had spent most of his career working for a company that had little international exposure. Moreover, he was not familiar with derivatives such as currency options, which until recently were not widely traded. However, Mr. Brown had recently hired an assistant, Mr. Dan Pross, who had some knowledge of hedging and derivatives. As a student at UCLA, Mr. Pross had traded various types of derivatives for his own portfolio and was familiar with how they were traded. Although Mr. Pross did not have a finance background, he was, in Mr. Brown’s opinion, extremely intelligent and highly capable. Mr. Brown suggested that Mr. Pross make a presentation to the senior management on the use of derivatives to reduce risk.

Speculative risk exists when there is uncertainty about an event that can produce either a profit or a loss.

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

Andrew Bailey (2013) “The future of UK banking - challenges ahead for promoting a stable sector”. Bank of England [online]. Available from:

Financial instruments such as derivatives and available-for-sale are measured and recognized at fair value method. The most common derivatives include forward contracts as an agreement to sell or to buy an asset at a fixed price in the future. Accordance with AASB 139, available-for-sale are those non-derivative that are designated for sale or that are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. Those financial instruments are initially recognized at their transaction price on market whose identical items (active market). Regarding unavailability active markets, management will perform their judgement and estimation to determine the fair value.

The definition of "derivatives" is also very wide, and includes options and warrants, whoever they are issued by, as well as rights and interests in respect of listed securities (or other derivatives).

Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.

Major profits made in both 2007 and 2008 allowed the bank to establish itself as one of the most powerful in the world. Nonetheless, the years’ following the crisis is a different story. Although no such losses were made, the bank encountered scandal after scandal, from a probe of energy trading practices to the London whale trading scandal and an investigation into whether the firm bribed Chinese officials by hiring their children (IRWIN, 2013) and additionally to the $13bn law suits from the department of justice for misleading investors about toxic Mortgage Backed Securities which later facilitated together with other lending practices the housing market crisis; and the worst financial crisis after the great depression in the

In 2008, the whole world encountered the biggest crisis on the economy generally in the finance sector. One of the essential driving factors of this was the deregulation in the finance industry. It permitted financial organizations to be engaged with offsetting the risk in fund exchange with the derivative. As a result, the financial institutions (like banks) claimed for more mortgages that would support derivatives trade that was profitable (Scott, 2010).

Intel uses those instruments to manage, currency exchange rate and interest rate risk as well as equity market risk and commodity price risk.

The forward and money-market hedges are discussed in detail below. At this point, it is sufficient to acknowledge that these financial contracts do mitigate the risk. Other suggested contracts are beyond the scope of this case, but should be acknowledged.

Most firms hedge at least some of their risks. Hedging can take two basic forms—namely, natural hedging and hedging by means of derivative instruments. The use of derivatives as hedges has expanded greatly in recent years.

Throughout the history of multinational banking, British banks have retained large market shares in a variety of countries over long periods of time (Jones, 1990 and Wilkins, 1970). As outlined at the initial stage of this dissertation, CSR as a concept appeared for the first time in the 1950s (Bowen, 1953). On that basis, this sub-section will focus on a historical perspective of Barclays from the post-war period onwards. The main banking strategies of the post-war period (1945-1980) emphasized geographical diversification. Barclays established branches overseas on the grounds that British multinational manufacturers would need the dynamic assistance of British banks in the post-war world. By establishing foreign branches, Barclays signalled to its clients that it was willing to guarantee all its global assets for local activities. Moreover, several banks established development corporations, with the intention of providing credit facilities in developing economies

Economic derivatives could be so unsafe that they could even a great cause of financial disasters. This is because many investors turn to financial derivatives market to direct them into future funding, rather than of observing at the genuine market. This can lead to market distortions and hence can be extended to other parties of the market connected in the market and thus financial position of a country can be obstructed badly. Derivative instruments were created after 1970s as a way to manage risk and create insurance downside. They were created in response to the frequent oil market shocks, inflation and drops in the stock markets. Hence the initial intend was to defend against the risk and protect against the downside. However, the derivatives became speculative tools often used to take more risk in order to maximize profits and returns. Derivatives do ensure against the risk when used properly, but when the packaged instruments became too complicated that neither the borrowers nor the rating agencies understood them or their risk and hence the initial premise just failed. Not only did investors, like pension fund, got stuck holding securities that in reality turned out to be equally as risky as holding the underlying loans, bank got stuck as well. Banks held many of these instruments on their books as a source of fixed income requirements and hence using these derivatives instruments as a collateral. However, later it was found out that they had less